OUTLOOK ’13: Asia’s PTA oversupply to worsen as demand growth lags

04 January 2013 10:13  [Source: ICIS news]

By Becky Zhang

SINGAPORE (ICIS)--The oversupply of purified terephthalic acid (PTA) in Asia is expected to worsen in 2013 as the ongoing massive capacity expansion in China exceeds demand growth from the downstream polyester industry, industrial sources said on Friday.

Asia’s PTA expansion is expected to reach 12m tonne/year in capacity in 2013, which will outstrip polyester expansion expected at around 8.7m tonne/year in capacity in 2013, the sources said.

Asia has added a total capacity of 7.6m tonnes/year of PTA in 2012, bringing the region’s total PTA capacity to 51m tonne/year by end-2012, according to ICIS.

Meanwhile, Asia’s polyester capacity rose by 6.5m tonnes/year, or 12%, to 60m tonnes/year in 2012.

China will see an addition of five projects, with a combined capacity of 10m tonnes/year of PTA, in 2013. The start-up of two of the projects, with a combined capacity of 5m tonne/year, was delayed from the fourth quarter of 2012 because of prolonged test runs, according to ICIS.

The overall operating rate of Asia’s PTA plants is likely to fall further to 69% in 2013 with the capacity to increase by 24% despite only an 8% demand growth expected from polyester sector, according to ICIS.

Asia’s PTA run rate fell sharply to 79% in 2012, nine percentage points lower than 2011 because of the production cutbacks, especially in Taiwan and South Korea, as a result of negative margins, according to ICIS.  

PTA margins have been at an average of around $40.00/tonne (€30.80/tonne) below the breakeven level for 10 consecutive months since March 2012, according to ICIS.

The breakeven level is calculated based on a product of a conversion ratio of 0.67 and the feedstock paraxylene (PX) prices and a $125/tonne of variable cost for PTA production. 

“The minimum run rate for PTA plants should not be below 70-75% considering [the] economics. Producers would rather shut their plants to minimize losses,” a major Taiwan-based PTA producer said.

It is estimated that around 3.5m tonne/year PTA capacity will be kept shut in 2013 to maintain the 70-75% minimum run rate, the producer said.

“I doubt the 12m tonne/year new capacity can all be started up in 2013 given the poor market situation and tight PX supply,” a South Korean PTA producer said.

Around 5.4m tonnes/year of PTA capacity in Taiwan, South Korea and China has been idle since early December 2012 without a definite restart schedule, according to ICIS.

PTA producers in Asia outside of China, worrying over eroding margins, proposed a contract formula with customers across the region that is linked with prices of feedstock PX.

“We have made some progress in the negotiation of the PX-linked contract formula, even with Chinese customers,” a South Korean PTA producer said.

The price for one of the agreed PTA contracts is calculated based on PTA production cost and PTA spot average prices on a CFR (cost & freight) China Main Port (CMP) Asia basis, a regional trader said.

The PTA production cost, in this case, is equivalent to PX prices multiply by 0.67 and plus a variable cost for PTA production, but the conversion cost was heard in a range of $110-$120/tonne from sources.

The other partially accepted formula adopts a premium of $1-10/tonne to the PTA spot average price on conditions that spot average prices are lower than PTA production cost, according to a Chinese polyester maker.

On the conditions that spot average prices are equal to or higher than PTA production cost, spot average price will be used as the benchmark for contract settlement, the end-user said.

Most polyester makers in China and India are resisting the PX-linked contract formula because it will raise their raw material cost by an average of $22/tonne per month based on the prices in 2012, according to ICIS data.  

The 2013 PTA contract remains largely “unsettled” although the new year has come, PTA producers and end-users said.

While Indian buyers are expected to concede to the new PX-linked formula because of supply shortage, Chinese end-users are in no hurry as the country’s PTA is oversupplied, industrial sources said.

China’s PTA capacity is to reach 38m tonnes/year by end-2013, while the country’s PTA demand is estimated at around 28.5m tonnes/year in 2013 with the assumption that China’s PTA demand growth stays at 8%, according to ICIS.

“China will be able to export PTA, to compete with other Asian PTA producers for the already-shrinking US dollar-denominated market,” a regional trader said.

China shipped its first batch of domestically produced PTA in August 2012 destined for India.

“Our total export volume to India is close to 10,000 tonnes this year and we have plans to expand export volumes further in the coming years,” said Yisheng Petrochemical, the largest PTA producer in China.

On the import front, China imported 5m tonne/year PTA (including qualified terephthalic acid) as of November in 2012, down by 15% from the same period in 2011, according to China Customs.

“China’s import volume [of PTA] is likely to shrink further to around 3m tonne/year in the coming years,” a major Taiwanese PTA producer said.

Buyers for US dollar-denominated cargoes will be limited to some export-oriented polyester makers without their own PTA production or those with tight cash flow issues, the PTA producer said.

The huge capacity expansion of polyester in China and India in 2013 will be able to partially absorb the additional PTA supply, but it is facing the same oversupply problem, said a major polyester maker in China.

There are around 30 new polyester projects reported in China to start up production in 2013, and the total capacity is around 8.5m tonne/year, according to market sources.

Of the 8.5m tonne/year new capacity, a capacity of 6.3m tonnes/year was considered by market players to have high potential to be put into operation in 2013.

However, the capacity growth at 17% is double the growth rate in demand which is estimated at around 8% in China, according to ICIS.

India, the second largest PTA consumption country, is said to be nine new polyester lines with a combined capacity of 2.2m tonne/year, market sources said.

“This will only result in an overall reduction of operating rate in India’s polyester industry as demand growth lags far behind [capacity growth],” a major Indian polyester maker said.

($1 = €0.77)

By: Becky Zhang
+65 6780 4359

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